Volatility Compression Continues

Last weeks SPX performance was as expected with ST sentiment showing Sells resulting in a continuation of the decline from Fri top of 4448 to about 4350 and low volatility.  The close Fri was 4348 and surprisingly the VIX was also lower which hurt options traders (see Tech/Other).  The performance of the VIX was so surprising that ZH had an article on it Fri.  Next week is expected to see more downside before sentiment improves and with the EOQ JPM call wall at SPX 4320 a move to 4300 or lower is likely by Fri.

ST sentiment improved last week and may provide for a 1-2 day bounce, but weakness indicated in SPX options OI means that rallies are expected to fail thru EOM.  Continued improvement in sentiment next week could lead to a strong bounce 1st half of July, but NDX sentiment at a weak Sell probably means disappointing EPS 2nd half of July and a stronger selloff.

This weeks Tech/Other section includes an update to the VIX call indicator to adjust for the VIX P/C as discussed last week and a look at how the volatility squeeze effected options pricing.  A new section is also added this week with Tech/Other dropdown history lists by year and is located before the conclusion.  The history lists currently go back thru late 2022 to include the 1960s data with "2022.12.10' the economic analysis debunking the "yield curve as a perfect recession indicator" for the last inflationary period of 1960-80 and "2022.12.24" the 1960s price analog using DJIA for 1966-70 compared to 2022-26.

I. Sentiment Indicators

The INT/LT Composite indicator (outlook 3 to 6+ months) has three separate components. 1st is the SPX and ETF put-call indicators (40%), 2nd the SPX 2X ETF INT ratio (30%), and 3rd a volatility indicator (30%) which combines the options volatility spread of the ST SPX (VIX) to the ST VIX (VVIX) with the UVXY $ volume.  This week breaks SPX options into volume adj (1/B-A) and traditional spread (A-B).

Update Alt. In this case the wts for the SPX 2X ETF ratio (SDS/SSO) and SPX puts & calls spread are adj to equal as in the DM/SM section for SPX ETFs.  Bearish sentiment was little changed and remains on a weak Sell.

Update Alt EMA.  Bearish sentiment was little changed and remains on a weak Sell.

The ST Composite as a ST (1-4 week) indicator includes the NYSE volume ratio indicator (NYDNV/NYUPV & NYDNV/NYDEC) and the UVXY $ Vol/SPX Trend. Weights are 80%/20%.

Update. Bearish sentiment moved up sharply and may support a 1-2 day rally, but the ST direction remains down.

Update EMA. Bearish sentiment VST (grn) reached a weak Buy so a bounce is likely, but LT (blu) is neutral so a directional change is unlikely.

The ST/INT Composite indicator (outlook 1 to 3 months) is based on the Hedge Spread (48%) and includes ST Composite (12%) and three options FOMO indicators using SPX (12%), ETF (12%), and Equity (12%) calls compared to the NY ADV/DEC issues (inverted). FOMO is shown when strong call volume is combined with strong NY ADV/DEC. See Investment Diary addition for full discussion.

Update EMA. Bearish sentiment increased somewhat, but remains negative.

Bonds (TNX).  Bearish sentiment continues to inch upward but remains near a Sell as rates are little changed.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment is presented in a new format using the data mining software to add the inverse TNX rate to the ETF ratio.

Update. Bearish sentiment for the ETFs remain near a weak Buy, but overall sentiment is neutral as prices continue to erode.  Gold seems to be following the SSEC downward.

II. Dumb Money/Smart Money Indicators

This is a new hybrid option/ETF Dumb Money/Smart Money Indicator as a INT/LT term (outlook 2-6 mns) bearish sentiment indicator. The use of ETFs increases the duration (term).

Update. Bearish sentiment was little changed.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment improved slightly but remains near the Mar 2022 lows.

A new composite SPX options indicator uses both the volume adj (1/B-A) and P/C equivalent spread (A-B) to compensate for the discrepancy between the two.  This replaces the old SPX options indicator for the SPX ETFs + options below and the INT/LT composite. No chart.
For the SPX, I am switching to hybrid 2X ETFs plus SPX options. Taking a look at the INT term composite (outlook 2 to 4 mns), bearish sentiment was little changed.

For the NDX combining the hybrid ETF options plus NDX 3X ETF sentiment with the interest rate effect,  (outlook 2 to 4 mns) bearish sentiment shows similar extremes between ETF and options as in late 2020 which resulted in a choppy market until options sentiment rose.  Note QQQ options are optimal, but are N/A and are included in ETF options.

Bearish sentiment declined slightly, now at the weak Sell.  July EPS season may be a disappointment as layoffs are likely to provide less support than 2023Q1.

III. Options Open Interest

Using Thur closing OI, remember that further out time frames are more likely to change over time, and that closing prices are more likely to be effected. Delta hedging may occur as reinforcement, negative when put support is broken or positive when call resistance is exceeded.  This week I will look out thru June 30. A text overlay is used for extreme OI to improve readability, P/C is not changed. Also, this week includes a look at the GDX & TLT for Sept exp.   A new addition is added for OI $ amounts with breakeven pts (BE) where call & put $ amounts cross.

With Fri close at SPX 4348, options OI for Mon is moderate with strong put support at 4300.  Calls from 4300-20 will attract prices as will puts at 4325 and 4350, midrange 4300-50 likely.

Wed has very small OI where SPX put support drops to 4235 and 4275.  A move below 4300 is possible, but overlapping puts from 4315-75 could spark a temporary rally toward 4375.

For Fri strong OI with strong call resistance at JPMs SPX 4320 and above with put support starting at 4300.  Close likely below 4320.

Using the GDX as a gold miner proxy closing at 29.8 likely range is 28-31.  Sept shows strong put support at 30, so longer downside should be limited.

Currently the TLT is 103.3 with the TNX at 3.74%, strong support/resistance is 95/110 and moderate support at 100.  Possible range 101-108 or TNX approx 3.4-3.8%.

IV. Technical / Other

This week I updated the VIX call indicator adding the VIX P/C adjustment mentioned last week.  The first chart is the original.

The second chart does not show any major changes except a much stronger Buy in Nov 2020 (good for SPX +50%) and weaker Sells for the last two signals.

I ran out of time to discuss the importance of the projected decline in volatility last week, but those of you probably noticed as it was extremely hard to make money with puts and leveraged ETFs.  With the VIX at 14.5 the previous Fri AM at SPX 4448, the VIX dropped to about 13 when the SPX was near 4340.  Most options investors are aware of price sensitivity (delta) and time to expiration (theta), but an overlooked sensitivity is to volatility (vega).  The result shown in the next chart is that even with a 100+ pt drop in SPX puts can still lose money.

This shows the intraday price for the SPX June 30 4300 put.  At Tue open of SPX 4300 it was $8, but by mid-Fri afternoon with the SPX down 50+ pts the price was near $5. especially notable was the sharp drop Thur with the SPX near 4370 and the VIX dropped almost a pt.

The following uses barcharts.com as a source and discusses S&P futures (ES) as a third venue of stock sentiment in addition to options and ETFs.  The non-commercial/commercial spread represents a LT bearish sentiment (dumb money/smart money) indicator. As explained in investopedia, commercial investors (red) are institutions and are smart money, while non-commercials (green) are speculators such as hedge funds and are dumb money. Here is the current  barchart graph for the S&P 500 (top) and trader positions (1st bot) with positives as net longs and negatives as net shorts.  Bearish sentiment is represented by the spread and is positive if red > green (Buy) and negative if green > red (Sell).  Sentiment is a strong BUY.

Tech / Other History

Click dropdown list to select from the following options:
2023
   06.17 OTDE Volume & Put/Call Ratio Drilldown - low volatility (VIX) ahead    06.10 Volatility indicators warning of a nearing top    05.20 A review of indicators that performed well in 2015    05.13 Comparing the VIX term structure (VIX/VXV) and volatility ratio (VIX/VVIX)    05.06 A review of the current int rates (TNX), unemployment and CPI compared to the 1960s    04.29 Addressing the negative M2 growth misconception, adding Barcharts ES outlook    04.15 Several LT/INT indicators show INT gains likely (SKEW&VIX/VXV,VIX/VVIX,BPSPX&SPXADP)    03.25 Comparison of PCE inflation and TNX rates to 1990s indicates possible tech meltup    03.18 Strong SPX volume at Mar optn exp supports Spring rally of 10%+    03.11 Low SPX P/C ratio indicates likely trading range    03.04 LT T-bonds (10/20yr) => more Fed tightening, LT NYSE Adv/Dec volume => possible ATH retest    01.28 SPX correlation w/liquidity, Fed bal sheet - Treasury Gen Acct - O/N reverse repo    01.14 Volatility indicators, ST VIX calls indicate pullback SPX 200 pts, INT/LT SKEW & VIX/VXV still bullish    01.07 Gold performance relate to int rates (TNX), and China stock market (SSEC)
2022
   12.24 Late 1960s analog, TNX,Unempl & CPI => Recession 2024-25, DJIA top Feb'66 retest late '69    12.17 A contrarian view to the consensus 2022H2 recession & bear narket low of SPX 3000    12.10 Yield curve inversion (since 1980) not perfect recess indicator compared to inflationary 1960-80    11.26 Sentiment indicators showing a sharp drop late Dec as a setup for a strong Spring rally    11.19 Sentiment indicators showing choppy move higher likely before pullback    11.05 Using the SPXADP with the VIX call only indicator improves effectiveness

Conclusions.  Hidden in the despair of the UK & EU rate hikes and recessionary PMI's for Europe, the US service sector PMI's showed continued growth and with the unexpected pickup in homebuilding, US 2nd Qtr GPD is estimated at 2%, well off a recession level.  The US remains well-cushioned from the fuel and food inflationary effects of the Russia-Ukraine war and the biggest threat is wage inflation latter in 2023 as strikes become more common and the current surge in credit-based spending comes to a halt.

Weekly Trade Alert.  A pickup in volatility is expected next week although the downside risk is not much below SPX 4300.  Updates @mrktsignals.

Investment Diary,  Indicator Primer, Tech/Other Refs,
 update 2021.07.xx  Data Mining Indicators - Update, Summer 2021,
 update 2020.02.07 Data Mining Indicators,
 update 2019.04.27 Stock Buybacks,
 update 2018.03.28 Dumb Money/Smart Money Indicators

Article Index 2019 by Topic, completed thru EOY 2020.02.04
Article Index 2018 by Topic
Article Index 2017 by Topic
Article Index 2016 by Topic

Long term forecasts

© 2023 SentimentSignals.blogspot.com

Seeing the Forest thru the Trees

Last week was not a good week to be a contrarian as strong bullish sentiment in the SPX 4300-400 area did little to hinder the "buy the rumor" aspect of the prospect of a Fed "pause" at the FOMC Wed.  At least  I continued to bat near 1000 on my economic outlook, correctly calling for a "hawkish" pause with more hikes expected later in the year.  Thur init jobless claims showed more weakness, which seemed to reignite the more dovish Fed outlook and reverse the "sell the news" trend, taking the SPX to the 4450 area mentioned as an EW target last week.  Taking a step back to look at the big picture, the first SPX rally off the Oct 2022 lows was also 600+ pts (A/1), while the consolidation wave (B/2) retraced about 400 pts, and so far the last rally leg (C/3) is 640 pts.  So the move over SPX 4400 should not have been a surprise, but wilth B/2 looking like a bear flag or H&S, its easy to see why many were surprised.  My biggest surprise was the near 78% retracement of the NDX since Jan.  If the pattern continues, we could see a 400 pt pullback to the same SPX 4050-100 by Sept-Oct before a final move to about 4700 by mid-2024 which would match the 1967-69 analog nicely.

This weeks Tech/Other section takes an in-depth look at the various put/call ratios and the possible effects of the strong increase in same day (0DTE) options trading.

I. Sentiment Indicators

The INT/LT Composite indicator (outlook 3 to 6+ months) has three separate components. 1st is the SPX and ETF put-call indicators (40%), 2nd the SPX 2X ETF INT ratio (30%), and 3rd a volatility indicator (30%) which combines the options volatility spread of the ST SPX (VIX) to the ST VIX (VVIX) with the UVXY $ volume.  This week breaks SPX options into volume adj (1/B-A) and traditional spread (A-B).

Update Alt. In this case the wts for the SPX 2X ETF ratio (SDS/SSO) and SPX puts & calls spread are adj to equal as in the DM/SM section for SPX ETFs.  Bearish sentiment took a sharp downturn last week indicating a multi-week pullback is likely soon.

Update Alt EMA.  Bearish sentiment continues to fall, but compared to 2021 a major top may still be several months away.

The ST Composite as a ST (1-4 week) indicator includes the NYSE volume ratio indicator (NYDNV/NYUPV & NYDNV/NYDEC) and the UVXY $ Vol/SPX Trend. Weights are 80%/20%.

Update. Bearish sentiment fell sharply, but remains short of an official Sell.  This may indicate a weaker decline or more topping behavior.

Update EMA. Bearish sentiment remains below the weak Sell level.

The ST VIX Call & SPXADP indicator is showing a Sell but as seen in Tech/Other the low VIX P/C may reduce its effectiveness.

The ST/INT Composite indicator (outlook 1 to 3 months) is based on the Hedge Spread (48%) and includes ST Composite (12%) and three options FOMO indicators using SPX (12%), ETF (12%), and Equity (12%) calls compared to the NY ADV/DEC issues (inverted). FOMO is shown when strong call volume is combined with strong NY ADV/DEC. See Investment Diary addition for full discussion.

Update EMA. Bearish sentiment declined close to a Sell that likely means the "easy" part of the rally is over, but as in late 2020 and 2021, continued advances are possible.

Bonds (TNX).  Bearish sentiment remains in a tight range below the weak Sell as int rates continue the rounded bottom, stalling in the 3.7-.8% area.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment is presented in a new format using the data mining software to add the inverse TNX rate to the ETF ratio.

Update. Bearish sentiment remains near neutral overall, while the weak Buy from ETF sentiment seems to have little effect.

II. Dumb Money/Smart Money Indicators

This is a new hybrid option/ETF Dumb Money/Smart Money Indicator as a INT/LT term (outlook 2-6 mns) bearish sentiment indicator. The use of ETFs increases the duration (term).

Update. Bearish sentiment spiked downward, nearing the levels seen in early 2021.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment saw a 1-day spike upward FOMC Wed that may help explain the late week strength, but ended just above the weak Sell level and at the lowest level in a year.

A new composite SPX options indicator uses both the volume adj (1/B-A) and P/C equivalent spread (A-B) to compensate for the discrepancy between the two.  This replaces the old SPX options indicator for the SPX ETFs + options below and the INT/LT composite. No chart.
For the SPX, I am switching to hybrid 2X ETFs plus SPX options. Taking a look at the INT term composite (outlook 2 to 4 mns), bearish sentiment remains near the neutral level near the ETF sentiment as options volume and put-call spread offset.

For the NDX combining the hybrid ETF options plus NDX 3X ETF sentiment with the interest rate effect,  (outlook 2 to 4 mns) bearish sentiment shows similar extremes between ETF and options as in late 2020 which resulted in a choppy market until options sentiment rose.  Note QQQ options are optimal, but are N/A and are included in ETF options.

Bearish sentiment fell sharply for the week as the NDX continued to soar over 15k, and now matches the sentiment level of the Mar 2022 high near 15.3k.

III. Options Open Interest

Using Thur closing OI, remember that further out time frames are more likely to change over time, and that closing prices are more likely to be effected. Delta hedging may occur as reinforcement, negative when put support is broken or positive when call resistance is exceeded.  This week I will look out thru June 23. A text overlay is used for extreme OI to improve readability, P/C is not changed. Also, this week includes a look at the GDX for Dec exp.   A new addition is added for OI $ amounts with breakeven pts (BE) where call & put $ amounts cross.

With Fri close at SPX 4410 and BE at 4175, options OI for Tue is moderate with strong call resistance at 4400.  Likely range SPX 4375-4400.

Wed has smaller OI where SPX has lower resistance at 4400 and could move higher, but if below 4375 a drop to 4350 is possible.

For Fri stronger SPX OI indicates a continued range of 4350-4400.

For Fri EOM strong call resistance at 4370 and at the JPM call position of 4320, indicate a drop toward 4320 is likely.  Core inflation PCE is released early AM and continued high numbers may be catalyst for a decline.

IV. Technical / Other

Part of the reason for reviewing the Put / Call ratios and components is the recent coverage of the growth in same day options (ODTE). The chart below shows the growth in 0DTE compared to other maturities growing from a few % in 2014 to over 40% of volume the last two years with the introduction of weekly then daily M/W/F to everyday for many (SPX & ETF) products.

The following shows the call volume (Equity, ETF, SPX) since 2018.   Just over the last two years, the result of 0DTE appears to have increased the volume of ETF options by 33% from 600k to 800k, while SPX options have doubled from 400k to 800K.  This may have had a negative effect in Equity volume.  As far as sentiment, there does seem to be a ST spike in call buying at ST and INT tops which we do see today, but the relative strength is hard to ascertain due to 0DTE growth.

Looking at the Equity P/C since 2018, the current P/C is at the same level as other multi-week tops since mid-2022, but not a major top.

Looking at the ETF P/C since 2018, spikes below 1.0 are usually seen before ST & INT tops, but the consolidation arouund 1.2 is unusual and may indicate a low volatility period similar to much of 2021.

Looking at the SPX P/C since 2018, there is definitely signs of higher volume that has been seen at INT tops, but the extreme low P/C is not.  This seems to be an artifact of 0DTE trading of puts & calls (strangles, etc) to make volatility plays and so the most likely outcome would be a reduction in volatility.  So, INT/LT bullish/neutral.

Looking at the VIX P/C & SPX since 2018, we see something similar to the SPX P/C with low P/C where the most similar period is mid-2018.

Looking at the VIX P/C & VIX since 2018, we see that the mid-2018 period was one of volatility compression where the VIX remained in a range of about 10-15 for an extended period and we may see something similar going forward.  The low P/C may reduce the effectiveness of the VIX Call indicator.

The following uses barcharts.com as a source and discusses S&P futures (ES) as a third venue of stock sentiment in addition to options and ETFs.  The non-commercial/commercial spread represents a LT bearish sentiment (dumb money/smart money) indicator. As explained in investopedia, commercial investors (red) are institutions and are smart money, while non-commercials (green) are speculators such as hedge funds and are dumb money. Here is the current  barchart graph for the S&P 500 (top) and trader positions (1st bot) with positives as net longs and negatives as net shorts.  Bearish sentiment is represented by the spread and is positive if red > green (Buy) and negative if green > red (Sell).  Sentiment is slightly weaker, but remains a strong BUY.

Conclusions.  The drop to SPX 3800 by Sept-Oct is starting to look less and less likely, however, the drop to 4050-4100 remains consistent with the SPX current rally pattern since Oct 2022 as the 4th wave of an impluse higher.  Its possible that a move into a major high in 2024 creates a divergence with a new ATH in NDX, but not in SPX or DJIA.  I'm no expert in TA, but I believe that leaves open the possiblity for higher highs even if the next bear leg drops down to the low SPX 3000's in 2025-26.  The main takeaway from the put/call analysis is that if there is a 4th wave down to SPX 4100 or lower, it will likely be less volatile than the Dec-Mar period.

Weekly Trade Alert.  Limited downside is expected next week from SPX 4350-4400+.  The following week may be more volatile with core PCE on Fri.  Updates @mrktsignals.

Investment Diary,  Indicator Primer, Tech/Other Refs,
 update 2021.07.xx  Data Mining Indicators - Update, Summer 2021,
 update 2020.02.07 Data Mining Indicators,
 update 2019.04.27 Stock Buybacks,
 update 2018.03.28 Dumb Money/Smart Money Indicators

Article Index 2019 by Topic, completed thru EOY 2020.02.04
Article Index 2018 by Topic
Article Index 2017 by Topic
Article Index 2016 by Topic

Long term forecasts

© 2023 SentimentSignals.blogspot.com

Will They or Won't They?

The pullback last week was somewhat less than expected by the EW analysts (SPX 4200, act 4160), but the result was a sharp decline in bearish sentiment which happened to coincide with the SPX 61.8% retracement of the 2022 decline (4311, act 4322).  While its too early to judge the significance, many sentiment indicators now match that of the Sept top of 2020 which resulted in several months of consolidation before a more lengthy bull market phase.  This followed a very strong rally phase off the Mar 2020 pandemic lows and resulted in a 10% correction or about a 30% retracement of the move from SPX 2200 to 3600.  While a 10% decline would be about the SPX 3800 level that many are expecting, a 30% retracement of the current rally would only result in a move to SPX 4050-4100.  I expect the later to hold with lows in the Sept-Oct time frame.

Much of investor sentiment over the last six month has over a "pivot" or "pause" based on the argument that the Fed had raised too much, too fast and a severe recession was just around the corner.  So far, however, the US has escaped a recession based on a surprisingly strong consumer sector resulting from strong jobs growth in the services area and record credit card usage.  In the EU, which has suffered from much higher fuel and food costs due to the Ukraine-Russia conflict, they have entered into a recession with two quarters of negative GDP at -0.1% growth each - the mildest recession possible.  Even with fairly robust growth (Q1 GDP revised up to 1.3%) and "sticky" inflation, the Fed is still more likely to adopt a "hawkish" pause for several months (ie, data dependent).  However, investors may be surprised to find that prices fully reflect that result and a "sell the news" is more likely.

The put/call analysis scheduled fpr this week is delayed to next week due to a review of several volatility indicators that indicate a ST/INT top/consolidation that may last into Sept/Oct when econimic activity is expected to make a turnaround..

I. Sentiment Indicators

The INT/LT Composite indicator (outlook 3 to 6+ months) has three separate components. 1st is the SPX and ETF put-call indicators (40%), 2nd the SPX 2X ETF INT ratio (30%), and 3rd a volatility indicator (30%) which combines the options volatility spread of the ST SPX (VIX) to the ST VIX (VVIX) with the UVXY $ volume.  This week breaks SPX options into volume adj (1/B-A) and traditional spread (A-B).

Update Alt. In this case the wts for the SPX 2X ETF ratio (SDS/SSO) and SPX puts & calls spread are adj to equal as in the DM/SM section for SPX ETFs.  Bearish sentiment continues to hover around the weak Sell level.

Update Alt EMA.  Bearish sentiment dropped sharply last week after a brief spike upward previously.  Although at a lower level, the drop from last year's peak of 4.5 SDs is about the same as Sept 2020.

The ST Composite as a ST (1-4 week) indicator includes the NYSE volume ratio indicator (NYDNV/NYUPV & NYDNV/NYDEC) and the UVXY $ Vol/SPX Trend. Weights are 80%/20%.

Update. Bearish sentiment turned down from neutral, but remains in a consolidation mode (minor trend changes).

Update EMA. Bearish sentiment VST (grn) has gone from positive to negative and is at a similar level as Sept 2020.

The ST/INT Composite indicator (outlook 1 to 3 months) is based on the Hedge Spread (48%) and includes ST Composite (12%) and three options FOMO indicators using SPX (12%), ETF (12%), and Equity (12%) calls compared to the NY ADV/DEC issues (inverted). FOMO is shown when strong call volume is combined with strong NY ADV/DEC. See Investment Diary addition for full discussion.

Update EMA. Bearish sentiment moved sharply lower matching the level of ST tops (2-4wks) since June 2022.  A pullback of several weeks is likely.

Bonds (TNX).  Bearish sentiment declined slightly last week, but remains near the Sell as a rounded bottom still seems likely.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment is presented in a new format using the data mining software to add the inverse TNX rate to the ETF ratio.

Update. Bearish sentiment is mildly positive based on strong ETF sentiment, up from neutral the prior week.

II. Dumb Money/Smart Money Indicators

This is a new hybrid option/ETF Dumb Money/Smart Money Indicator as a INT/LT term (outlook 2-6 mns) bearish sentiment indicator. The use of ETFs increases the duration (term).

Update. Bearish sentiment turned down very sharply and may indicate that a larger decline of 10%.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment moved modestly lower, matching the lowest levels since June of 2022 and increasing the possibility of a 5-10% pullback.

A new composite SPX options indicator uses both the volume adj (1/B-A) and P/C equivalent spread (A-B) to compensate for the discrepancy between the two.  This replaces the old SPX options indicator for the SPX ETFs + options below and the INT/LT composite. No chart.

For the SPX, I am switching to hybrid 2X ETFs plus SPX options. Taking a look at the INT term composite (outlook 2 to 4 mns), bearish sentiment remains near the neutral level from below, while Sept 2020 was near neutral from above and may indicate a smaller pullback.

For the NDX combining the hybrid ETF options plus NDX 3X ETF sentiment with the interest rate effect,  (outlook 2 to 4 mns) bearish sentiment shows similar extremes between ETF and options as in late 2020 which resulted in a choppy market until options sentiment rose.  Note QQQ options are optimal, but are N/A and are included in ETF options.

Bearish sentiment continues to decline, nearing the lowest level since the Jan 2022 top except for Dec 2022.  The meltup expected in 2024 appears to have accelerated due to AI mania and has now retraced 67% of the 2022 decline.  Future performance is likely to match that of SPX.

III. Options Open Interest

Using Thur closing OI, remember that further out time frames are more likely to change over time, and that closing prices are more likely to be effected. Delta hedging may occur as reinforcement, negative when put support is broken or positive when call resistance is exceeded.  This week I will look out thru June 16. A text overlay is used for extreme OI to improve readability, P/C is not changed. A new addition is added for OI $ amounts with breakeven pts (BE) where call & put $ amounts cross.

With Fri close at SPX 4299, options OI for Mon is moderate with strong call resistance at 4300 and put support at 4200.  A drop to 4175 or lower is likely.

FOMC Wed has small OI where SPX has strong put support at 4160-80.  Anywhere between 4200 and 4325 is possible with a bias toward 4250-75.

For EOQ Fri AM strong OI and a very large $OI indicates a strong incentive for dealers to drive prices lower toward SPX 4200.  A "sell the news" is likely with a Fed "pause".

For EOQ Fri PM moderate/strong OI shows a very strong bullish bet on a breakout to SPX 4300-400 with a Fed "pause" while contrary opinion indicates a selloff is more likely to 4250 or lower.

For EOM strong OI in calls over SPX 4300 will likely push prices lower toward 4200-4250.

IV. Technical / Other

This week I want to look at several of the volatility indicators which were pointed out a couple of weeks ago which worked well in earlier periods. The first is the SKEW and VIX term structure (1 mn VIX/ 3mn VXV).  I had been looking for a drop to the Mar 2022 level, but the sharp rise in the SKEW now matches the Sept 2020 SPX top that preceded a consolidation period for several months.

The second is the INT Volatility composite which part of the overall INT/LT composite.  Here, we see a stairstep decline since the SPX Sept 2022 low that now also matches the Sept 2020 SPX top.

The rhird is the ST VIX Call Indicator with SPXADP.  Here, sentiment has passed the weak Sell level after consolidting near neutral for several weeks that is somewhat similar to Sept 2020.

The following uses barcharts.com as a source and discusses S&P futures (ES) as a third venue of stock sentiment in addition to options and ETFs.  The non-commercial/commercial spread represents a LT bearish sentiment (dumb money/smart money) indicator. As explained in investopedia, commercial investors (red) are institutions and are smart money, while non-commercials (green) are speculators such as hedge funds and are dumb money. Here is the current  barchart graph for the S&P 500 (top) and trader positions (1st bot) with positives as net longs and negatives as net shorts.  Bearish sentiment is represented by the spread and is positive if red > green (Buy) and negative if green > red (Sell).  Sentiment showed a sharp reversal last week, but remains a strong BUY.

Conclusions.  Last weeks move to SPX 4300+ was a week earlier than expected and resulted in a significant shift in bearish sentiment with options OI indicating a move well into the 4300-400 area next week for opt exp and FOMC.  As a contrarian this looks likely to be setup for a reversal to catch all of the newly converted bulls off guard.  One example is a well-respected EW analyst, that had been predicting a wave 3 decline to SPX 2700-3000 since Nov 2022, to switch to looking for a wave 3 advance to SPX 4450.  Current sentiment indicates that a pullback will likely be a "pause to refresh" that could last several months in a 5-6% range of SPX 4050-4300 until economic clouds clear up.

Weekly Trade Alert.  Stock prices may hold up until Wed FOMC, but a ST move toward SPX 4200 is likely as a "sell the news" event on a Fed pause in rate hikes.  Updates @mrktsignals.

Investment Diary,  Indicator Primer, Tech/Other Refs,
 update 2021.07.xx  Data Mining Indicators - Update, Summer 2021,
 update 2020.02.07 Data Mining Indicators,
 update 2019.04.27 Stock Buybacks,
 update 2018.03.28 Dumb Money/Smart Money Indicators

Article Index 2019 by Topic, completed thru EOY 2020.02.04
Article Index 2018 by Topic
Article Index 2017 by Topic
Article Index 2016 by Topic

Long term forecasts

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